Economics - Principle of Economics

A price index:

- Always includes a base year - Measures the cost of purchasing a market basket of output across different years. - Is normalized to 100 for the base year.

Which of the following explain why flexible-income receivers may be unaffected or benefit by unanticipated inflation?

- Business owner's profits may rise if product prices rise faster than resource prices. - Demand-pull inflation may cause some nominal incomes to increase faster than inflation and lead to real income increases. - The receive COLAs. - Their incomes may automatically increase when the CPI increases.

Which of the following can change the equilibrium interest rate?

- Changes in the supply of money - Changed in the demand of money

____ inflation will continue for a long time, while ____ inflation is self-limiting.

Demand-pull; cost-push

The marginal ____ of investment is the interest rate paid for borrowed funds.

cost

Social security payments automatically increase when the CPI goes up because of the ____.

cost of living adjustments

Inflation caused by an increase in the per-unit production costs at each level of total spending is called:

cost-push

The rocketing prices of imported oil in 1973-1974 and again in 1979-1980 are good illustrations of:

cost-push inflation

Unanticipated inflation benefits debtors because:

debtors pay back loans with less valuable dollars

In order to avoid the problems created by using money values to measure GDP, when prices rise GDP should be ____ and then prices fall GDP should be ____.

decreased; increased

Too much spending chasing too few goods is the essence of ____- ____ inflation.

demand; pull

The intersection of demand and supply determines the ____ price for money.

equilibrium

Demand-Pull

excess total spending

During hyperinflation, the value of money:

falls rapidly

If Sue saved $1000 in the bank and earns 6% interest and inflation is greater than 6%, then the:

real value or purchasing power of the savings will decline

Cost-push inflation will reduce supply and lower real output and employment which will eventually generate an economic ____.

recession

If Sally's nominal income increases by 10% and the price level increases by 6%, Sally's real income will:

rise 4%

People with flexible incomes may be:

unaffected or benefit by unanticipated inflation

The money supply is represented by a ____ line because the monetary authorities and financial institutions have provided the economy with some particular stock of money.

vertical

The real-world, more complex GDP price index used in the United States is called the chain-type annual ____ price index.

weighted

Deflation is a great economic problem because:

prices and wages fall but debts remain the same

In the market for money, the intersection of demand and supply determines which of the following?

- The equilibrium price of money - The interest rate

Inflation that is expected is also referred to as ____ inflation and inflation that is unexpected is referred to as ____ inflation.

- anticipated - unanticipated

____ GDP uses current prices while ____ uses prices adjusted for inflation.

- nominal - real

Inflation caused by an excess of total spending beyond the economy's capacity to produce is called:

demand-pull inflation

A measure of the value of a specified collection of goods and services in a given year is compared to the value of a highly similar collection of goods and services in a reference year is called a(n) ____ ____.

price index

Real income equals nominal income divided by the ____ ____.

price index

Which of the following are combines to determine the equilibrium rate of interest?

Demand for money and supply of money.

True or False: One perspective on how demand-pull inflation negatively effects output is that low levels of inflation may reduce real output because inflation diverts time and effort to activities designed to protect against inflation.

True

which of the following statements best summarizes how inflation may redistribute real income?

When a change in the price level differs from a change in a person's nominal income

A lender who charges an inflation premium to a borrower is altering the redistribution of income due to:

anticipated inflation

The formula for the ____ ____ ____ is the price of the money recent market basket in a particular year divided by the price estimate of the market basket in 1982-1984 multiplied by 100.

consumer price index

When inflation occurs:

each dollar of income will buy fewer goods and services than before

Combining the demand for money and the supply of money determines the ____ rate of interest.

equilibrium

Improper identification of the source of ____ may cause a delay in the government's decision to undertake policies to reduce excessive total spending.

inflation

____ redistributes total real income.

inflation

____ reduces the purchasing power of money.

inflation

Nominal GDP is not an accurate measure of the real level of economic activity in a country because:

inflation distorts the real value of all goods and services produced

Changes in the demand for money, the supple of money, or both can change the equilibrium ____ rate.

interest

What is the name of the price that borrowers needs to pay lenders for transferring purchasing power to the future?

interest

As the result of unanticipated inflation, workers are better off while firms are worse off if the actual inflation rate:

is less than the expected inflation rate

Firms respond to cost-push inflation by producing ____ output, such that unemployment increases.

less

One perspective on the relationship between demand-pull inflation and real output is that even low levels of inflation:

may reduce real output because inflation diverts time and effort toward activities designed to protect against inflation

The real rate of interest is the ____ rate of interest minus the rate of inflation.

nominal

Income that is received as wages and is not adjusted for inflation is called:

nominal income

Coast-push inflation causes quantity demanded to fall, and firms respond by

producing less, which increases unemployment

A decrease in the supply of money will ____ the equilibrium interest rate.

raise

____ income will be affected if the change in the price level differs from the change in a person's nominal income.

real

Nominal GDP divided by price index (in hundredths) equals:

real GDP

Income that has been adjusted for changes in prices over time is called:

real income

Inflation redistributes:

real income

The major source of cost-push inflation has been so-called ____ shocks.

supply

Food and energy prices often complicate the measurement of inflation because:

supply and demand often change creating temporary changes in prices

The biggest cost associated with unanticipated inflation is:

the arbitrary redistribution of income and wealth

Savers can balance their losses due to inflation if:

the interest rate earned on savings is equal to or greater than the unexpected inflation

The nominal interest rate is the percentage increase in money that the borrowers pays the lender while the real interest rate is:

the percentage increase in purchasing power that the borrower pays the lender

If nominal income rises by 10% from $100 to $110 and the price level index rises by 6% from 100 to 106 then, real income has to increase to:

$103.77

According to some economists, which of the following are positive effects of mild inflation?

- Firms can more easily adjust real wages downward when the demand for their products fall. - Firms earn higher profits - Firms will have a strong demand for labor - Firms have an incentive to expand their plants and equipment

Interest is the financial cost of borrowing ____ capital in order to purchase ____ capital.

- Money - Real

The Fed's primary influence is on which of the following?

- Money supply - Interest rate

Which statements describe how even low levels of inflation may negatively affect real output?

- People hold less cash and have to spend more time going to the bank or online to transfer money - Businesses incur the costs of changing prices to reflect inflation - Households and businesses spend time and effort distinguishing between real and nominal wages and interest rates

The ____ interest rate is the percentage increase in purchasing power that the borrower pays the lender, while the ____ interest rate is the percentage increase in money that the borrower pays the lender.

- Real - Nominal

People who are ____ are hurt by unanticipated inflation.

- Savers - Creditors - On fixed incomes

If the real economic growth is 3%, the inflation rate 5%, and the nominal interest rate 7%, then the real rate of interest is:

2%

If the price of a basket of goods in year 1 is $20 and the price of the same basket of goods is $10 in the base year, then the price index for year 1 is:

200

If the price of a market basket of goods in year 1 is $10 and $25 in year 3 and the base year is year 1, the price index for year 3 is ____.

250

If the inflation is 3% and the real interest rate is 5%, then the nominal interest rate is:

8%

Which of the following are winners and losers from unanticipated inflation?

Fixed-Income Receivers -- Losers; their real earnings will deteriorate when inflation occurs Savers -- Losers; the real value of the assets deteriorate Creditors -- Losers; the real value of their assets deteriorate Flexible-Income Receivers -- Winners; they may get automatic COLA increases and nominal income may increase more than price level Debtors -- Winners; real income increases

Flexible-income receivers and debtors are unaffected or helped by inflation because:

Inflation redistributes real income toward them and away from others

Which of the following best describes the nominal interest rate?

Interest rates that are quoted in the market

Which of the following best describes nominal interest rate?

Interest rates that are quoted in the market.

When the expected rate of inflation is added to the real interest rate, the result is called the ____.

Nominal interest rate

Which type of interest rate is used to make investment decisions?

Real

____ GDP, or adjusted GDP, reflects changes in the price level.

Real

The formula for calculating a price index is:

The price of a market basket in a specific year divided by the price of the same market basket in the base year multiplied by 100

The nominal interest rate minus the rate of inflation equals what?

The real interest rate

The use of money as a common denominator to sum output into a meaningful measure of GDP creates a problem because:

The value of money itself changes

Cost-push inflation can contribute to a recession by:

increasing prices which reduces output and leads to lower employment and lower real incomes.

Real income will remain the same when:

nominal income rises at the same percentage rate as does the price index.

demand-pull is most likely associated with a ____ GDP gap and a cost-push is more likely associated with a ____ GDP gap.

positive; negative